Startups are often lauded as being nimble, creative, and innovative. But there’s another side to startups that isn’t talked about as often: their vulnerability. Startups are especially vulnerable to employee fraud. Why? They typically have fewer employees and less formalized policies and procedures. This combination can create an environment where employees may feel they can get away with fraudulent behavior. If you’re a startup founder or leader, it’s important to be aware of the risks of employee fraud and take steps to mitigate them.
What Is Occupational Fraud?
In recent years, employee fraud has been on the rise in the United States. According to the Association of Certified Fraud Examiners (ACFE), occupational fraud is defined as “any illegal act characterized by deception, concealment, or violation of trust and is committed by an employee in the course of their employment.” The ACFE publishes an annual report called “A Report to the Nations,” which analyzes employee/occupational fraud cases around the world.
There are three main types of occupational fraud: asset misappropriation, corruption, and financial statement fraud.
Asset misappropriation is the most common type of occupational fraud, accounting for 86% of ACFE’s reported cases. This type of fraud includes activities such as theft of cash or inventory, false expense reports, and fraudulent billing schemes. Although they are the most common types of fraud, the ACFE says their the least costly.
Corruption is the second most common type of occupational fraud, accounting for 12% of all reported cases. This type of fraud includes activities such as bribery and kickbacks. Asset misappropriation with corruption accounted for 32% of employee fraud cases in 2021.
Financial statement fraud is the least common type of occupational fraud, accounting for 9% of all reported cases. This type of fraud includes activities such as cooking the books and creating false invoices. It might be the least common type of fraud, but it is the costliest, with companies experiencing an average loss of $593,000.
To protect your startup from employee fraud, it’s important to be aware of the signs that something may be going wrong. Some red flags to watch out for include employees who are living beyond their means, employees who are resistant to changes in procedures, and employees who have a history of financial problems.
Common Types of Employee Fraud
There are many different types of employee fraud, but some are more common than others. Here are a few of the most common types of employee fraud:
- Time theft: This is when an employee is paid for time that they have not actually worked. Accomplish this by clocking in early or clocking out late, taking long lunches, or taking extended breaks. Consider using an online time tracker for everyone in your organization.
- Expense reimbursement fraud: This is when an employee submits false or inflated expense reports in order to receive reimbursement for personal expenses. Use an expense management app to streamline employee expenses.
- Payroll fraud: This is when an employee falsifies their time sheet or payroll information in order to receive a higher wage than they are actually entitled to. Consider outsourcing payroll to a reputable agency with secure, cloud-based portals for collaboration.
- Inventory theft: This is when an employee steals inventory from their employer, either for personal use or resale.
- Information theft: This is when an employee steals confidential or proprietary information from their employer, such as customer lists or trade secrets. Does your startup have a nondisclosure agreement or a noncompete clause?
Understanding Payments Fraud
Payments fraud is a type of fraud that involves the unauthorized use of funds to make payments. This can happen when an employee uses company funds to make personal purchases, or when a third party uses stolen credit card information to make fraudulent payments on behalf of a company.
According to J.P.Morgan, in 2021, 71% of organizations were victims of payments fraud attacks or attempts.
There are a few things startups can do to protect themselves from payments fraud. First, they should have strong internal controls in place to prevent employees from misusing company funds. Second, they should be vigilant about checking for suspicious activity on their payment accounts. And finally, they should consider using a fraud detection service to help identify and prevent fraudulent payments before they happen.
Additionally, when issuing paper checks, look for secure checks that have built-in technology to prevent tampering, photocopying, and forgery. The J.P.Morgan report found that ACH debits and checks accounted for the most payments fraud activity.
How to Prevent Employee Fraud
Employee fraud is a serious problem for startups. According to a report by the Association of Certified Fraud Examiners, small businesses are hit hardest by employee fraud, with losses averaging $140,000 per company.
But, there are several things startups can do to prevent employee fraud, including:
- Conduct background checks on all employees.
- Implement strong internal controls.
- Educate employees about the signs of fraud and what to do if they suspect it.
- Monitor employee activity closely.
- Encourage employees to report suspicious behavior anonymously.